October 6, 2006 Stock Market Recap

The indices just thrashed around on Friday resulting in a slightly down day. So the picture looks much like it did at Thursday's close. We're at short-term overbought territory as evidenced by the indices being near their upper Bollinger Bands and by their overbought short-term stochastics. I'm expecting the indices to head back towards the bottom of their channels (middle Bollinger Bands / 20-day moving averages) this week. Assuming that pullback comes on low volume I'd look to be a buyer around those channel bottoms.

While looking at the daily S&P chart in TeleChart I noticed that it was bumping up against an old trendline that I drew back in 2005. That trendline connects the March 2003 low with the October 2005 low. Those old trendlines can sometimes turn from old support to new resistance (or vice versa). So it will be interesting to see if the S&P can climb back above that line. But even if it doesn't, it could theoretically keep chasing that trendline to infinity. Wouldn't that be nice? Yeah right...

I've gotten a few questions about T2108 recently. I find it to be much more useful at bottoms than at tops. The psychology of tops is very different than bottoms. You get a lot of people buying pullbacks from new highs and that typically means that tops take longer to form. So it's a lot tougher to call a top, especially with just one indicator like T2108. Having said that, T2108 isn't even in the danger zone yet, above 80. I find it interesting that it popped above 80 in early September but has yet to crack 77 yet in October with the S&P and Dow hitting new highs. That tells me one of two things -- either less stocks are participating in the October rally or the some of the laggards are playing catch up to some of the stalled leaders.